ITAD BIR RULING NO.

168-12

Articles 11 (Interest) Philippines-

Netherlands tax treaty

Puno and Puno Law Offices

12th Floor, East Tower
Philippine Stock Exchange Center
Exchange Road, Ortigas Center
Pasig City

Attention: Maria Elizabeth E. Peralta-Loriega

Ranulfo Gerardo V. Payos, Jr.
Cecily Nerisse C. Ramirez-dela Cruz

Gentlemen :

This refers to your tax treaty relief application ("TTRA") filed on July 11,
2011 requesting confirmation that interest paid by Century Properties, Inc. ("Century
Properties") to APG Strategic Real Estate Pool NV ("APG Strategic") is subject to income
tax at the rate of 15 percent pursuant to the Convention between the Kingdom of the
Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax
treaty").
Facts
APG Strategic is a corporation organized and existing under the laws of the
Netherlands and is resident thereof based on its Certificate of Incorporation, on the
extract from the trade register of the Chambers of Commerce of Amsterdam in the
Netherlands on July 12, 2011, and on the Declaration of Residence issued by the Tax
Administration of Arnhem in the Netherlands on June 16, 2011. APG Strategic is
situated at Gustav Mahlerplein 3, 1082 MS Amsterdam, the Netherlands. APG
Strategic is not registered as a corporation or partnership in the Philippines based on
the Certification of Non-Registration of Company issued by the Securities and
Exchange Commission on July 13, 2011. On the other hand, Century Properties is a
domestic corporation situated at 21st Floor, Pacific Star Building, Sen. Gil Puyat
Avenue corner Makati Avenue, Makati City, Philippines.
On January 11, 2011, APG Strategic; Century Properties; Messrs. Jose E.B. Antonio,
John Victor R. Antonio, Jose Marco R. Antonio, Jose Roberto R. Antonio, Jose Carlo R.
Antonio (collectively, the "Majority Shareholders"); andCentury City Development
Corporation ("Century City Development") and Century Limitless Corporation ("Century
Limitless") (collectively, the "Assignors") entered into an Omnibus Agreement consisting
of a Prefatory Agreement, aConvertible Bonds Subscription Agreement and an Assignment
Agreement.
Under the Prefatory Agreement, Century Properties has authorized the issuance
of convertible bonds in the aggregate of P2,250,000,000.00 convertible into common
shares of Century Properties ("Convertible Bonds"). APG Strategic has agreed to invest
in the Convertible Bonds. As security for the timely payment, discharge, observance
and performance by Century Properties of its obligations under the Omnibus
Agreement and the Convertible Bonds,Century Properties, APG Strategic and the
Assignors have agreed to enter into an Assignment Agreement.
Under the Convertible Bonds Subscription Agreement, Century Properties, as
issuer, will issue the Convertible Bonds in two tranches: first tranche in the aggregate
of P1,600,000,000.00 ("Tranche 1 Convertible Bonds") and second tranche in the
aggregate of P650,000,000.00 ("Tranche 2 Convertible Bonds"). Each bond has a
principal or denomination of P10,000,000.00. The Convertible Bonds will be issued at
a subscription price equivalent to 100 percent of the principal amount of each
respective tranches. The Convertible Bonds will be issued upon the issuance by the
Singapore Exchange Securities Trading Ltd. of its approval in principle of the listing
of the Convertible Bonds in its stock exchange, and upon the satisfaction of all other
conditions set by the parties. Century Properties will maintain and keep a register on
the names and addresses of the holders of the Convertible Bonds, including other
related information such as subsequent transfers of these bonds. Century
Properties will cause the Convertible Bonds to be listed in the Singapore Exchange
Securities Trading Ltd. within five days from the date of their issuance. Century
Properties will issue one certificate for each tranche of the Convertible Bonds. Century
Properties will use the proceeds of the Convertible Bonds to fund its current and future
property development projects and for general corporate and working capital
purposes.
The Convertible Bonds bear interest from the date of their issuance
until Century Properties' common shares of stock are listed in the Philippine Stock
Exchange (or other alternative stock exchange), or until the maturity date of these
bonds falling on the fifth anniversary from the date of their issuance, whichever is
earlier. The rate of interest is initially 12.50 percent per annum and will increase to
14.50 percent per annum from the third anniversary of the issuance of the bonds.
Interest is payable semiannually. The Convertible Bonds will cease to bear interest
when they are subsequently transformed into conversion shares or when they are
redeemed on their maturity. The bonds are deemed conversion shares when Century
Properties' shares are listed in the Philippine Stock Exchange (or other alternative
stock exchange). Each Convertible Bond is redeemable at premium equivalent to 15
percent per annum of the principal of the bond. As of date, Century Properties has an
authorized capital stock of P10,000,000.00 of which common shares with value of
P6,857,227.00 are issued and outstanding. AICEDc
 Based on the Certificate of Inward Remittance issued by Deutsche Bank AG
Manila 1 on September 6, 2011, APG Strategic remitted on January 13, 2011 the amount
of P1,600,000,000.00 (€28,318,584.07) for Tranche 1 Convertible Bonds, which was
credited to the account of Century City Development.
Ruling
In reply, please be informed that under Section 14 of Revenue Memorandum
Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications
(TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010"), which covers
income derived or which accrued on November 4, 2010 and thereafter, any availment of
tax treaty relief (exemption from income tax or reduction of tax) shall be preceded by
an application filed at the International Tax Affairs Division ("ITAD") of this
Bureau before the first taxable event subject of the TTRA, to wit:
"SEC. 14. When and Where to File the TTRA. — All tax treaty relief
applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-
S, 0901-T, 0901-O and 0901-C) relative to the implementation and
interpretation of the provisions of Philippine tax treaties shall only be
submitted to and received by the International Tax Affairs Division
(ITAD). If the forms or any necessary documents are submitted to any
other BIR Office, the application shall be considered as improperly filed.
Filing should always be made BEFORE the transaction. Transaction for
purposes of filing the TTRA shall mean before the occurrence of the first
taxable event.
Failure to properly file the TTRA with ITAD within the period prescribed
herein shall have the effect of disqualifying the TTRA under this RMO."
(Emphasis ours)
In view of the foregoing, since the subject TTRA was filed on July 11, 2011, and
the Omnibus Agreement that gives rise to the payment of interest by Century
Properties to APG Strategic took effect on January 11, 2011, this Office hereby DENIES
relief on interest paid on and before the filing of the TTRA, pursuant to Section 14
of RMO 72-2010. Accordingly, said interest paid on and before July 11, 2011 shall be
subject to income tax at the rate of 20 percentunder Section 28 (B) (1) of the National
Internal Revenue Code of 1997 ("Tax Code"), as amended, to wit:
"SEC. 28. Rates of Income Tax on Foreign Corporations. —
xxx xxx xxx
(B) Tax on Nonresident Foreign Corporation. —
xxx xxx xxx
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. —
 (a) Interest on Foreign Loans. —A final withholding tax at the rate of
twenty percent (20%) is hereby imposed on the amount of interest
on foreign loans contracted on or after August 1, 1986."
On the other hand, interest paid to APG Strategic on July 12, 2011 and
thereafter is subject to relief under paragraphs 1 and 2, Article 11 of the Philippines-
Netherlands tax treaty, to wit:
"Article 11
INTEREST
1. Interest arising in one of the States and paid to a resident of the other
State may be taxed in that other State. DCcIaE
2. However, such interest may also be taxed in the State in which it arises
and according to the laws of that State, but if the recipient is the beneficial
owner of the interest the tax so charged shall not exceed:
a) 10 per cent of the gross amount if such interest is paid:
(i) in connection with the sale on credit of
any industrial, commercial or scientific equipment,
or
(ii) on any loan of whatever kind granted by
a bank, or any other financial institution,
(iii) in respect of public issues of bonds,
debentures or similar obligations,
b) 15 per cent of the gross amount of the interest in all other cases.
xxx xxx xxx
5. The term 'interest' as used in this Article means income from
Government securities, bonds or debentures, whether or not secured by
mortgage but not carrying a right to participate in profits, and debt-claims
of every kind as well as all other income assimilated to income from
money lent by the taxation law of the State in which the income arises.
Penalty charges for late payment shall not be regarded as interest for the
purpose of this Article."
Under paragraph 2 of Article 11, interest arising in the Philippines and paid to
a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed:
(a) 10 percent if the interest is paid in connection with the sale on credit of any
industrial, commercial or scientific equipment, on any loan of whatever kind granted
by a bank or other financial institution, or in respect of public issues of bonds,
debentures or similar obligations; and (b) 15 percent in all other cases.
 As to interest on bonds, the following commentaries of the Organisation for
Economic Co-operation and Development Model Tax Convention on Income and on
Capital (Condensed Version, July 2010) mention:
"Paragraph 3
18. Paragraph 3 specifies the meaning to be attached to the term 'interest'
for the application of the taxation treatment defined by the Article. The
term designates, in general, income from debt-claims of every kind,
whether or not secured by mortgage and whether or not carrying a right
to participate in profits. The term 'debt-claims of every kind' obviously
embraces cash deposits and security in the form of money, as well as
government securities, and bonds and debentures, although the three
latter are specially mentioned because of their importance and of certain
peculiarities that they may present. It is recognised, on the one hand, that
mortgage interest comes within the category of income from movable
capital (revenus de capitaux mobiliers), even though certain countries
assimilate it to income from immovable property. On the other hand,
debt-claims, and bonds and debentures in particular, which carry a right
to participate in the debtor's profits are nonetheless regarded as loans if
the contract by its general character clearly evidences a loan at interest.
19. Interest on participating bonds should not normally be considered as
a dividend, and neither should interest on convertible bonds until such
time as the bonds are actually converted into shares. However, the interest
on such bonds should be considered as a dividend if the loan effectively
shares the risks run by the debtor company (see inter alia paragraph 25 of
the Commentary on Article 10). In situations of presumed thin
capitalisation, it is sometimes difficult to distinguish between dividends
and interest and in order to avoid any possibility of overlap between the
categories of income dealt with in Article 10 and Article 11 respectively, it
should be noted that the term 'interest' as used in Article 11 does not
include items of income which are dealt with under Article 10. CcAITa
20. As regards, more particularly, government securities, and bonds and
debentures, the text specifies that premiums or prizes attaching thereto
constitute interest. Generally speaking, what constitutes interest yielded
by a loan security, and may properly be taxed as such in the State of
source, is all that the institution issuing the loan pays over and above the
amount paid by the subscriber, that is to say, the interest accruing plus
any premium paid at redemption or at issue. It follows that when a bond
or debenture has been issued at a premium, the excess of the amount paid
by the subscriber over that repaid to him may constitute negative interest
which should be deducted from the interest that is taxable. On the other
hand, any profit or loss which a holder of such a security realises by the
 sale thereof to another person does not enter into the concept of interest.
Such profit or loss may, depending on the case, constitute either
a business profit or a loss, a capital gain or a loss, or income falling under
Article 21."
Based on the commentaries, government securities, bonds and debentures are
specially mentioned in Article 11 because of their importance and of certain
peculiarities that they may present although income from these instruments is clearly
in the nature of interest since these instruments have an underlying debt to speak of.
Also, interest on convertible bonds remains to be treated as such and not dividends
until these bonds are actually converted into shares. Furthermore, interest on bonds
includes not only regular interest earned during the term of the bond but also
premium paid by the issuer at the time of the redemption of the bond.
Accordingly, with respect to interest on the Convertible Bonds paid by Century
Properties to APG Strategic under the Omnibus Agreement, since the interest is not in
connection with the sale on credit of any industrial, commercial or scientific
equipment, on any loan of whatever kind granted by a bank or other financial
institution, or in respect of public issues of bonds, debentures or similar obligations,
such interest paid on July 12, 2011 and thereafter, including premium paid thereon at
the time of redemption of the bonds, shall be subject to income tax at the rate of 15
percent under paragraph 2 (b), Article 11 of the Philippines-Netherlands tax treaty.
Finally, under Section 179 of the Tax Code, the Convertible Bonds subject of
the Omnibus Agreement is subject to documentary stamp tax equivalent to P1.00 for
every P200.00 (or a fraction thereof) of the principal of the whole bonds, to wit:
"SEC. 179. Stamp Tax on All Debt Instruments. — On every original issue of
debt instruments, there shall be collected a documentary stamp tax of One
peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof,
of the issue price of any such debt instrument: Provided, That for such
debt instruments with terms of less than one (1) year, the documentary
stamp tax to be collected shall be of a proportional amount in accordance
with the ratio of its terms in number of days to three hundred sixty-five
(365) days: Provided, further, That only one documentary stamp tax shall
be imposed on either loan agreement, or promissory notes issued to
secure such loan. IaAScD
For purposes of this section, the term debt instrument shall mean
instruments representing borrowing and lending transactions including
but not limited to debentures, certificates of indebtedness, due bills,
bonds, loan agreements, including those signed abroad wherein the object
of the contract is located or is used in the Philippines, instruments and
securities issued by the government or any of its instrumentalities,
deposit substitute debt instruments, certificates or other evidences of
deposits that are either drawing interest significantly higher than the
 regular savings deposit taking into consideration the size of the deposit
and the risks involved or drawing interest and having a specific maturity
date, orders for payment of any sum of money otherwise than at sight or
on demand, promissory notes, whether negotiable or non-negotiable,
except bank notes issued for circulation."
This ruling is issued on the basis of the actual facts as represented. However, if
upon investigation it shall be disclosed that the facts are different, then this ruling
shall be without force and effect insofar as the herein parties are concerned.

Very truly yours,

(SGD.) KIM S. JACINTO-HENARES

Commissioner of Internal Revenue
||| (ITAD BIR Ruling No. 168-12, [April 20, 2012])